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SoftBank has generated headlines this month with its $20 billion offer for 70% of Sprint, the struggling #3 U.S. mobile carrier, marking the deal the largest-ever overseas acquisition by a Japanese company. Market reaction is clearly betting against the deal: SoftBank’s stock price plunged more than 20% in the days following the announcement on 15th of October.

Sprint Nextel itself has lost more than $41 billion during the past five years, shunned by other reported potential buyers, such as SK Telecom from Korea and Carlos Slim from Mexico. So is the market right about the negative potential for this deal? Or does SoftBank and its CEO, Masayoshi Son, have a strategy we don’t yet realize?

Chances for Success

Laurence Capron

On the face of it, the market’s negative view may well be correct. SoftBank has little acquisition experience in the U.S. And we can all think of big American deals that have failed to deliver promised value, ranging from iconic cases such as Snapple-Quaker Oats and AOL–Time Warner, to Sprint itself’s more recent combination with Nextel in 2005. So, the smart money may be right to short sell SoftBank.

But there is a potential upside to the SoftBank-Sprint deal that is worth thinking through. In our recent book, “Build, Borrow, or Buy: Solving the Growth Dilemma”, we talk about the role of acquisitions in helping firms make major changes to their resource portfolio and in leading market transformation. Based on our research, we recommend using acquisitions only when other approaches – including internal development, basic contracts, and alliances – do not make sense, typically when the changes that a firm wants to make are too complicated for the simpler relationships to succeed.

Will Mitchell

Clearly, the changes that Sprint needs to become a profitable business will require deep transformation, almost certainly through a takeover. By providing Sprint with $8.0 billion USD of new capital for its mobile network, strategic investments and balance sheet, as well as leveraging its expertise in smartphones and mobile networks, SoftBank could establish an operating base as one of the largest mobile Internet companies in the world, and the combined mobile telecom service revenue will rank third amongst global operators.

Synergies are not Enough

But the synergy opportunities between SoftBank and Sprint are not enough – SoftBank needs to have the capabilities to undertake the turnaround and integration of Sprint after closing the deal. When digging deeper into SoftBank’s capabilities, there might be a silver line worth considering.

SoftBank actually does have rich domestic and international M&A experience and know-how to draw from, even if that experience has not been visible to the naysayers in the US. The most visible acquisition from the far side of the Pacific is SoftBank’s acquisition of Vodaphone Japan in 2006, which SoftBank turned into a successful player in that country. That is a good starting point. Of course, though, success with one deal in Japan does not immediately translate into success in the U.S. But, largely out of sight of Western notice, SoftBank has been highly active in deals throughout Asia, with more than 100 deals on its own during that past decade plus another 50 or so via its interest in Yahoo Japan. Indeed, a big part of Softbank’s success in Japan stems from its willingness to buy and transform targets, unlike many of its peers in that country, which has historically had among the lowest M&A rates in the world. And, quietly, SoftBank has made about a dozen small acquisitions of software and component firms in the U.S. during the past decade, typically for less than $100 million.

Beyond maneuvering a successful takeover, SoftBank will need to do more than extract operational efficiencies from Sprint if the deal is to succeed. First, Sprint Nextel also needs fundamental changes in its basic business model. Simply trying to out-compete Verizon and AT&T head on will be a recipe for disaster. For Sprint Nextel to succeed, it will need to find a new mix of mobile services and related products for the U.S. market and potentially beyond this country. Here is where there is some glimmer of potential for SoftBank to make a difference, by drawing on its experience with different services in Japan, Korea, and elsewhere in Asia.

Again, there is no guarantee and no crystal ball for SoftBank-Sprint. But if SoftBank has a clear vision for how to change Sprint and, in the process, hep reshape the mobile communications market in the U.S. That is a tall order. But, if it succeeds, it will create major value.

Laurence Capron is the Paul Desmarais Chaired Professor of Strategy at INSEAD and the Director of “M&As and Corporate Strategy” Executive Education Programme at INSEAD. Will Mitchell holds the Anthony S. Fell Chair in New Technologies and Commercialization at the University of Toronto (Rotman School of Management) and is the J. Rex Fuqua Professor of International Management at Duke University’s Fuqua School of Business. They are authors of “Build, Borrow or Buy: Solving the Growth Dilemma” (Harvard Business Press, 2012).

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